IFRS 16: are you ready?
IFRS 16 - Are you ready?
In January 2019 IFRS 16 will be introduced after many years in the making and will almost certainly impact the majority of larger businesses who follow IFRS accounting standards, assuming they utilise rentals or leases. Leasing is an important, sometimes essential, finance solution as it gives companies the opportunity to use property or equipment whilst avoiding large outlays of cash at the beginning.
2019 may feel quite far away at the moment, but working towards IFRS 16 should begin now, if you haven’t already, as implementation may be cumbersome and potentially costly.
So, are you ready for these changes and have you started the implementation process?
Why has IFRS 16 been issued?
The main reason was to develop an accounting standard that prevented off-balance sheet finance from taking place. One of the biggest and most notable changes is eliminating the concept of 'operating' & 'finance' leasing, instead introducing a single model that requires lessees to acknowledge the following:
- Assets & liabilities for leases with a term of 12months or more, unless the asset is of low value.
- Depreciation of lease assets separately from interest in lease liabilities on the income statement.
The IFRS 16 project was started back in 2005 after both IASB and FASB (US Financial Accounting Standards Board) acknowledged that the majority of leasing transactions were not reported on the balance sheet, causing both Assets & Liabilities to be understated. In fact, it was reported by a recognised stock exchange 4 years ago that almost $3 trillion worth of off balance sheet lease commitments were disclosed.
The impact of IFRS 16 will vary from company to company, but perhaps the impact is best described by PwC who conducted a global lease capitalisation study and estimate the following:
Industry Median increase in debt Median increase in EBITDA
Retail 98% 13%
Airlines 47% 33%
Prof Services 42% 15%
Health Care 36% 24%
Transport 24% 20%
There are many things to consider before January 2019, much more than we can include in this short blog, but you should be looking into the potential cost impact to your business now. From a review of processes and controls required to any new IT systems potentially needed - particularly if your leases are still managed and accounted for via a spreadsheet – it’s imperative to begin mitigating any issues that may arise. Due to the complexity of new leasing standard, spreadsheets may no longer be cost-efficient and may be prone to more errors in the longer term.
Do not underestimate the task ahead - understand where your leasing information is stored, who owns it, and ensure you understand it. Some companies may have so many contracts they will need to work out how many are actually leases!
So don't wait - act now and put your mind at ease.